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Report Shows 30% of Employers Likely to Opt Out of Offering Health Coverage After Reforms in 2014

Source: WSJ - Janet Adamy

Posted on 08 Jun 2011

A new report finds that 30% of employers are likely to stop offering workers health insurance once most of President Obama's health overhaul takes effect in 2014.

The findings from the McKinsey & Co. report come as a growing number of employers are seeking waivers from an early provision in the overhaul that requires them to enrich their benefits this year. At the end of April, the administration had granted 1,372 employers, unions and insurance companies one-year waivers to the law's requirement that they not cap annual benefit payouts below $750,000 a year.

The law doesn't allow for such exemptions starting in 2014, leaving all those entities—and other employers whose plans don't meet the requirement—to change their offerings or drop coverage.

Previous research has suggested that the number of employers who opt to drop coverage altogether in 2014 would be minimal.

But the McKinsey study predicts a more dramatic shift away from employer-sponsored health plans once the new marketplace takes effect. Starting in 2014, all but the smallest employers will be required to provide insurance or pay a fine, while most Americans will have to carry coverage or pay a different fine. Lower earners will get subsidies to help them pay for plans.

In surveying 1,300 employers earlier this year, McKinsey found that 30% said they would "definitely or probably" stop offering employer coverage in the years after 2014. That figure increased to more than 50% among employers with a high awareness of the overhaul law.

The Obama administration says it is working to encourage employers to retain insurance coverage. An administration official, Nick Papas, described the McKinsey report as an outlier amid other research suggesting most employers would keep coverage.

"History has shown that reform motivates more businesses to offer insurance," he said. "When Massachusetts enacted health reform, the number of individuals with employer-sponsored insurance increased."

The nonpartisan Congressional Budget Office, in a March 2010 report, found that by 2019, about six million to seven million people who otherwise would have had access to coverage through their job won't have it owing to the new law. That estimate represents about 4% of the roughly 160 million people projected to have employment-based coverage in 2019.

However, the CBO estimated that the overall number of Americans with coverage will rise by 32 million because of new subsidies and other steps.

The law contains a disincentive for employers to drop coverage. It requires all employers with more than 50 employees to offer health benefits to every full-time worker or pay a penalty of $2,000 per worker, though it doesn't apply to the first 30 workers. Health-policy experts have questioned whether that's high enough to discourage companies from dropping coverage.

McKinsey found that at least 30% of employers would gain economically from dropping coverage even if they completely compensated employees for the change through other benefit offerings or higher salaries. The study suggests the fallout would be minimal, with more than 85% of employees remaining at their jobs even if their employer stopped offering insurance.

Nearly half of the employers surveyed said they'd consider some alternative to their current plan after 2014. Besides dropping coverage, that included weighing a switch to a defined-contribution model of health insurance, or in effect offering coverage only to certain e